While there was no unexpected overnight central bank announcement unlike yesterday’s surprise by the RBA which unleashed volatility havoc in the FX market, which promptly spilled over into all asset classes, overnight stocks around the world saw another leg lower without a tangible catalyst, while EM currencies fell to a one-month low after two Fed presidents raised concern investors had become too complacent in their belief that U.S. interest rate raises will stay on hold. Or perhaps all that is happening is that after ignoring Trump, the market is starting to finally price in the possible reality of the Donald in the White House (although as Jeff Gundlach pointed out, Trump would be a far better president for the economy and the market than Hillary or Bernie).

“Equity market sentiment seems to be rolling over globally as the wind begins to come out of the oil price rally,” said Angus Nicholson, market analyst at IG in Melbourne. “Given the move in commodity prices, the materials and energy sectors are set for a difficult session.”

The dollar has climbed against all its 16 major peers since Monday’s close as Atlanta Fed President Dennis Lockhart called a June rate increase “a real option,” while San Francisco’s John Williams said he would support such a move at the next meeting provided the U.S. economy stayed on track. While both are non-voting members of the Federal Open Market Committee, the outlook for Fed policy is under scrutiny with data on nonfarm payrolls due at the end of the week.

“While the probability of a hike next month is very low, I do think the market is underpricing the chances of a hike after that,” Michael Wang, a strategist at hedge fund Amiya Capital told Bloomberg. “And to that extent emerging markets may be vulnerable.”

As the chart below shows, the market is clearly unprepared for a rate hike and is pricing in a 90% chance of no Fed move next month.

As a result, stocks in Europe and developing nations fell for a fourth straight day while Asian shares have now fallen for the 6th session, their longest losing streak since the February lows. The dollar extended Tuesday’s recovery from the weakest level in almost a year, while Russia’s ruble tumbled the most in more than a week and Malaysia’s ringgit dropped to the lowest since March. After briefly bouncing on yesterday’s API inventory data, oil resumes its decline before official DOE stockpile data scheduled for release Wednesday that’s forecast to show a fuel glut is expanding.

Europe’s Stoxx 600 Index was down 0.6% with all industry groups in the red. Anheuser-Busch InBev NV slid 3.1% after reporting sales and profit growth that missed estimates. BHP Billiton Ltd. tumbled after it was named in a $44 billion law suit over a dam rupture in Brazil that caused deaths and severe environmental damage. In the green were Siemens, Europe’s largest engineering company, up 0.6% and Societe Generale which rose 3.8% after both reported better earnings than analysts forecast.

The MSCI Emerging Markets Index of stocks fell 1 percent to the lowest in almost a month. Russia’s Micex Index dropped 1.1 percent as trading resumed following a two-day holiday. The Hang Seng China Enterprises Index fell 0.6%, dropping for a third day, and the Shanghai Composite Index slipped less than 0.1 percent. US equity futures were down 0.7%, after dropping 0.9% in the last session.

Market Wrap

• S&P 500 futures down 0.7% to 2042
• Stoxx 600 down 0.5% to 334
• FTSE 100 down 0.6% to 6147
• DAX down 0.4% to 9883
• German 10Yr yield up less than 1bp to 0.21%
• Italian 10Yr yield up 5bps to 1.5%
• Spanish 10Yr yield up 5bps to 1.61%
• S&P GSCI Index down less than 0.1% to 348.2
• MSCI Asia Pacific down 0.9% to 128
• Nikkei 225 closed
• Hang Seng down 0.7% to 20526
• Shanghai Composite down less than 0.1% to 2991
• S&P/ASX 200 down 1.5% to 5271
• US 10-yr yield down less than 1bp to 1.79%
• Dollar Index up 0.12% to 93.06
• WTI Crude futures down 0.1% to $43.60
• Brent Futures down less than 0.1% to $44.95
• Gold spot down 0.6% to $1,279
• Silver spot down 0.5% to $17.33

Global Top News

• JetBlue and Bombardier Said to Resume Talks on C Series Order: Agreement would follow recent purchase of 75 jets by Delta
• Aeropostale Files for Bankruptcy in Latest Retailer Meltdown: Changing tastes, fast-fashion rivals prove too much for chain
• Takata Survival Seen Getting Harder With Wider Air-Bag Recalls: Co.’s talks with U.S. regulators could lead to recall of millions of additional vehicles
• Altice Gets Approval From FCC to Acquire Cablevision Systems: Co. is pleased with decision, sticks with plans to complete deal in 2Q
• Trump Nomination All But Certain After Indiana Win, Cruz Quits: Sanders surprises Clinton with defeat in Democratic race
• Pfizer Said to Approach Medivation on Potential Buy: Reuters
• Hellman & Friedman Said Near $7.5b Purchase of MultiPlan: WSJ
• Target to Overhaul Rules, Fines to Quicken Supply Chain: Reuters
• TSMC to Make Processors for New Apple Products: Comm. Times

Looking at regional markets, Asia stocks traded lower following Wall St.’s losses as growth concerns and commodity weakness dampens sentiment. ASX 200 (-1.5%) saw losses in energy and basic materials after WTI crude futures fell below USD 44/bbl and iron ore decline over 4%, while index heavyweight BHP Billiton also underperformed after Brazil filed a USD 43b1n civil lawsuit against Co.’s Samarco JV. Chinese markets were also weighed by the commodity declines, although the Shanghai Comp (-0.1 %) has fared better than its peers after the PBoC continued to provide liquidity into the interbank market with another CNY 100bIn injection. As a reminder, Japanese markets remain closed for Greenery Day

Asian Top News

• PBOC Opens Taps to China Policy Banks in Bid to Sharpen Stimulus: Lending for policy banks now approved at start of each month
• Indonesia Growth Fails to Pick Up in Setback to Jokowi Reforms: 1Q GDP increases 4.92% y/y vs est. 5.07%
• Hong Kong Bank Funds Said Frozen for Some Tangled in 1MDB Probe: Individuals affected probed by authorities outside Malaysia
• Xi’s Silk Road Dream for China Hits a Speed-Bump in Thailand: S.E. nation rejects offer of financing for rail project
• Mobius Says Buy Commodity Stocks as Rebound’s Just Beginning: Templeton Emerging Markets adding holdings of China producers
• Ayala Land Says 1Q Profit Rose 14% Y/y, Spent 23.4b Pesos: 1Q sales +8% to 26.97b pesos

In Europe, equities trade modestly in the red after a slew of earnings updates from notable large caps dictated the state of play. The underperformer of the morning has been the FTSE 100 with shares of mining heavyweight BHP Billiton tumbling after reports that Brazil have filed a USD 43b1n lawsuit against the Co., while the DAX moved south of 9950 having tripped below yesterday’s low.

From a fixed income perspective, Bunds initially edged lower with yields rising and as such the curve notably bear steepened. Additionally, German paper underperformed relative to USTs given the large amount of supply expected hitting the market with government bond auctions from France, Germany and the UK totalling around EUR 14bIn. However, with the auctions now out the way, Bunds have pared much of their opening losses to head into the North American open around the 163.00 level.

European Top News

• Shell Quarterly Profit Beats Estimates on Refining Earnings: Company cuts billions more dollars from capital spending plan
• AB InBev First-Quarter Sales Miss Estimates on Brazil: U.S. sales to retailers fell 0.3% on adjusted calendar basis
• Credit Suisse Sells Debt Assets to TPG Arm for $1.27 Billion: Sale results in charge of about $100m for Credit Suisse
• Societe Generale Beats Profit Estimates, Plans Deeper Cuts: Bank announces additional cost cuts of EU220m
• Siemens Quarterly Profit Beats Estimates on Power Orders: Cost-savings goal lifted to as much as EU950m this year
• Adidas Decides to Sell Golf Division to Focus on Clothing: Talks planned for disposal of TaylorMade, Adams and Ashworth
• Euro-Area Economy Starts Quarter in a ‘Low Gear,’ Markit Says: Composite PMI at 53 in April, services gauge at 53.1

In FX, the dollar appreciated 0.1 percent to $1.1486 per euro and advanced 0.2 percent to 106.79 yen. Japanese Finance Minister Taro Aso said Tuesday, when the currency reached an 18-month high, that the government is monitoring speculative foreign-exchange trades and will respond if needed. The yen has strengthened more than twice as much as any other major currency in the past week as the Bank of Japan unexpectedly refrained from adding to stimulus at a policy review.

The MSCI Emerging Markets Currency Index fell for a third day, sliding 0.7 percent. Malaysia’s ringgit dropped 1.4 percent, the most since September, and South Korea’s won weakened 1.2 percent. “The market is grasping the view that the dollar probably fell a little too much, and a rebound could be ahead, and this seems to have deteriorated sentiment towards emerging-market assets including the won,” said Jeon Seung Ji, a currency analyst in Seoul at Samsung Futures Inc.

Risk sentiment is steady as a result, and enough to keep the JPY pairs in tight ranges for now. USD/JPY tested 107.50 higher up, but clearly rejected this, but on the downside, the recent USD revival means there is no rush to test the mid 105.00’s again just yet. EUR/USD buyers from 1.1470 — previous resistance, but no convincing come-back as yet. Data-wise, EU services were a touch off expectations, more so retail sales. UK construction PMIs were also below forecasts, but to limited effect.

In commodities, WTI and Brent have both traded flat for the session after falling in recent days. The level to look for in WTI on the downside would be USD 43.28/bbl as this could provide some support, and if this level breaks, the next notable level is USD 41.80/bbl. Also in the commodities sector Gold prices retreated further away from the USD 1300/oz level and on a technical note the key support level to look out for is the USD 1272.00 level, Silver has also come off highs and now resides at the 23.6 fib level at USD 17.27/oz also the RSI is showing a slight bullish divergence which could mean a brief relief move to the upside. Elsewhere copper and iron ore also saw lacklustre trade amid global growth concerns and also weighed as USD recovered from near 16-month lows.

On the US calendar,  it is a busy session kicked off by the April ADP employment change print (195k expected) which will be closely watched ahead of payrolls on Friday. The March trade balance is then due to be released, followed by Q1 nonfarm productivity and unit labour costs data. Later on today we’ll then get those services and composite PMI’s, followed imminently by the ISM non-manufacturing reading for April. Expectations are for a modest pick-up to 54.8 which if true will confirm the biggest spread between the ISM series since January. March factory orders data is also due along with any final revisions to the durable and capital goods orders data.

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities have spent much of the session in the red, while Bunds have pared much of their opening losses in the wake of a slew of European auctions
• USD-Index continues to grind higher ahead of the North American crossover, paring some of the recent heavy losses
• Today’s highlights include US ADP Employment, Services PMI, US Factory Orders and ISM Non-Manufacturing and DoE crude oil inventory report
• Treasuries steady in overnight trading as global markets and precious metals sell off; U.S. Treasury will release quarterly refunding announcement at 8:30am ET.
• Low interest rates are helping to reduce euro-area public debt, but rigorous enforcement of European Union fiscal rules is also needed to bring the burden down by a “sizable” amount, the European Central Bank said
• Chinese debt investors are turning bearish at just the wrong time for the nation’s corporate borrowers, which face a record 3.7 trillion yuan ($571 billion) of local bond maturities through year-end
• China’s central bank is turning on the credit taps to its policy banks as it seeks to support the economy by channeling credit to designated areas of the government’s choosing
• Record-low interest rates and wild market swings are eroding profit at Europe’s banks, with no end in sight. From UBS’s wealth-management unit to Commerzbank’s consumer-lending business, income is shrinking as margins get squeezed and clients avoid trading
• Societe Generale SA reported an unexpected increase in first-quarter profit, boosted by consumer banking, and announced plans to deepen cost cuts at its investment bank. The shares jumped
• Donald Trump became the presumptive Republican presidential nominee on Tuesday after driving his top challenger, Texas Senator Ted Cruz, from the race with a crushing Indiana primary win
• Sovereign 10Y yields mixed; European and Asian equity markets drop (Japan closed); U.S. equity-index futures fall. WTI crude oil drops, metals lower

DB’s Jim Reid concludes the overnight wrap

Small ash clouds gathered over markets yesterday as it was back to risk-off mode as investors contemplated a number of variables all of which contributed to a distinctly weaker tone through the session. FX volatility has been a big theme of late and yesterday was case in point with some sharp and wild moves across key currencies. Indeed the intraday ranges for the Euro, Yen and Sterling were 1.04%, 1.07% and 1.63% respectively. The Euro in fact touched 1.162 yesterday matching the highs of August last year, while the Yen was as strong as 105.55 at one stage and the strongest in 18-months. As a result the Dollar index broke below 92 in early trading (and so nearing 2014 levels) before swinging back to a late session gain (of +0.34%) before the close of play. Still, the range topped 1.20% and if we look further afield at EM currencies there were losses of at least 1.50% for currencies in Turkey, Brazil, Mexico, South Africa and Colombia. The RBA rate cut also contributed to a near 2.5% decline for the Aussie Dollar.

Also not helping was a weaker session for commodities. WTI continued its slide after falling -2.52% and is now back below $44/bbl having traded as high as $46.78 intraday at the back end of last week. That earlier softer than expected manufacturing data in China also contributed to a poor day for base metals with the likes of Copper (-2.57%), Aluminium (-2.74%) and Iron Ore (-4.27%) all falling heavily. Even Gold (-0.39%) went against its usual safe haven status. So that saw mining and energy names get heavily hit, while banks stocks also had a day to forget after disappointing earnings reports out of UBS and Commerzbank saw their share prices tumble 8% and 10% respectively and so lead the sector broadly lower.

By the close of play the Stoxx 600 was down -1.66%, while the S&P 500 closed out the day with a -0.87% loss and so more than wiped out Monday’s gains. The index has now retreated on three out of the last four sessions and it appears that the rally which has essentially been going since mid-February is losing momentum. Credit markets mirrored the weaker performance for risk. In Europe the iTraxx Main and Crossover indices ended 3bps and 10bps wider (with financials indices hit harder) while in the US the CDX IG index closed over 3bps wider. Rates markets were the biggest beneficiaries yesterday. 10y Treasury yields were nearly 8bps lower and closed back below 1.80% for the first time in two weeks, while similar maturity Bund yields rallied to the tune of nearly 7bps.

This morning in Asia we’ve seen bourses largely follow that weak lead from the US last night and trade in the red for the most part. The Hang Seng (-1.19%), Kospi (-0.62%) and ASX (-1.05%) in particular are down the most, while losses for bourses in China have generally been more modest. The Shanghai Comp is down -0.22% currently. Markets in Japan are still closed for a public holiday, although the Yen is actually half a percent weaker this morning and bucking the recent trend.

With no data released overnight, the other big focus this morning is the US Presidential Election race. After Trump secured the Indiana primary, the big news since is the announcement that Ted Cruz has decided to withdraw from the Republican race and so all but confirms Trump as the Republican nominee. Sanders defeated Clinton in the Indiana primary for the Democratic race, but it looks unlikely to stop Clinton now likely facing off against Trump.

Moving on. Despite the still lowly probability (12%) being priced into a rate hike by the Fed in June, some attributed yesterday’s reversal in the US Dollar off the lows to the comments from Fed officials yesterday. Both San Francisco Fed President Williams and Atlanta Fed President Lockhart stuck to the Fed script by not ruling out the possibility of a move next month. Lockhart said specifically that ‘I would put more probability on it being a real option’ and the ‘communication of committee participants and members between now and mid-June obviously should try to prepare the markets for at least a realistic range of possibilities’. Meanwhile, Williams went as far as to say that should inflation continue to rise towards the Fed’s target and growth rebounds towards his 2% target for the year, then ‘it would be appropriate’ to ‘go that next step’ in hiking in June.

In fact we’ve heard from Lockhart again overnight and while the bulk of his comments reinforced those made during the day, he also added that the uncertainty stemming from the Brexit referendum ‘has some potential to loom large as we approach the June meeting’. June is all of a sudden looking like a big month for markets and it’s worth highlighting that in the time between June 15th and June 26th, we’ll have the FOMC meeting (on the 15th), BoJ meeting (on the 16th), BoE meeting (on the 16th), UK EU referendum (on the 23rd) and a possible Spain election on the 26th. In the background we’ll also have the ECB starting their corporate bond purchases, with their success likely to be a big factor in credit markets in June and beyond.

Elsewhere, despite the weaker day for markets yesterday the economic data out of the US was actually fairly reasonable. The IBD/TIPP economic optimism reading in May firmed 2.4pts to 48.7 (vs. 46.5 expected) and so reaching the highest level in a year. Meanwhile vehicle sales rose last month. Total vehicle sales increased to an annualised rate of 17.3m (vs. 17.4m expected) having plummeted to 16.5m in March. Domestic vehicle sales printed at 13.5m (vs. 13.4m expected), a rise of 500k. Finally the ISM NY was up a fairly robust 6.6pts to 57.0.
In Europe the main data of note was out of the UK where the April manufacturing PMI came in at a disappointing 49.2 – the first sub 50 reading for 3 years. That represented a decline of 1.5pts from March after expectations had been for a rise to 51.2. Elsewhere the Euro area PPI reading printed higher than expected last month at +0.3% mom (vs. 0.0% expected).

Looking at today’s calendar, this morning in Europe the calendar is dominated by the release of the April services and composite PMI’s. We’ll get the final revisions for the Euro area, Germany and France as well as the data for the peripheral countries. Euro area retail sales are also worth keeping an eye on today. Meanwhile it’s a packed calendar across the pond this afternoon. Kicking things off will be the April ADP employment change print (195k expected) which will be closely watched ahead of payrolls on Friday. The March trade balance is then due to be released, followed by Q1 nonfarm productivity and unit labour costs data. Later on today we’ll then get those services and composite PMI’s, followed imminently by the ISM non-manufacturing reading for April. Expectations are for a modest pick-up to 54.8 which if true will confirm the biggest spread between the ISM series since January. March factory orders data is also due along with any final revisions to the durable and capital goods orders data. Away from the data we’re due to hear from the Fed’s Kashkari, while the ECB’s Weidmann is also scheduled to speak today. Earnings wise we’ve got 38 S&P 500 companies scheduled to report with the highlights being Kraft Heinz and Metlife. In Europe we’ll get earnings reports from 29 Stoxx 600 companies including Royal Dutch Shell. So plenty to keep us busy.